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Integrity’s Protector: The Vital Role of the CFO

AUTHOR: Deborah Tarrant   DATE: 18.05.06   ISSUE 1, 2006

The CFO – as a leader with the capacity to look beyond the numbers to observe and influence the health and culture of a workplace – can be as important to an organisation as the CEO, according to Jillian Broadbent, a non executive director of several public companies and a board member of the Reserve Bank of Australia (RBA).

With the sobering fallout from recent business failures, such as HIH and OneTel in Australia and Enron and WorldCom in the United States, the significance of the CFO in creating sustainable success is now in sharper focus.

“A skilled CFO has responsibility for the financial reports, and supported by a talented team is in a good position to detect early signs of bad health and poor culture in an organisation,” Broadbent told a gathering of highly engaged CFOs at a recent AGSM Lifelong Learning event.

Broadbent cautioned the group against adopting the attitude that “the end justifies the means” and emphasised the need to instigate processes that deliver early alerts to potentially damaging circumstances or behaviours within their organisations.

In a wide-ranging speech, Broadbent underscored her points by observing that appropriate early warning systems could have prevented the headline-grabbing situations which confronted the National Australia Bank over unauthorised foreign exchange dealings in 2003 and AWB Ltd’s role in the United Nations’ Oil for Food scandal, currently being scrutinised by the Cole Commission of Inquiry.

She highlighted CFOs’ salience in the early detection process and their strategic role in being able to recognise when someone is trying to hide the truth or seems “uncomfortable when presenting”.

The CFO’s role is particularly crucial in ensuring the integrity, openness and honesty of an organisation because finance more than any other function is involved right across a company. “Finance is the language common to all stakeholders,” observed Broadbent who holds a unique vantage point. Beyond her RBA board role, she is a respected company director with a strong executive background in banking and finance, which included heading risk management for Bankers’ Trust Australia. Among her current portfolio of board positions are directorships of top-listed companies, Woodside and Coca-Cola Amatil, and the Special Broadcasting Service.

Drawing on insights from her career, Broadbent insisted she had always considered finance as “the circulation system that runs through the body of the business”. “The CFO being responsible for that circulation system is, therefore, a key player... While the CEO determines the key drivers of the business, the CFO designs the key indicators of those drivers and ensures the integrity of those indicators,” she pointed out.

There are risks inherent in today’s corporate world when a company’s spin is allowed to become its unquestioned reality, she said. “In wanting your own activity or company to succeed, there can be a tendency to will good news over bad, to celebrate success and avoid examining the shortcomings. Public relations teams often favour the positive, reinforcing the companies’ strengths rather than the threats they face.”

It is the desire to live up to the spin that can put an organisation in jeopardy – and the degree and spread of corporate damage is worse when it occurs from an artificially elevated position. This was the case with Enron, where the expectations among employees and shareholders had been built up to a level where they were unsustainable. “There are no soft landings from such a position,” she said.

While the CFO is responsible for establishing processes and checks to
support the accuracy and integrity of the numbers, Broadbent asserted, processes are no substitute for a spirit and attitude which is constructive
and honest.

One of the challenges she identified for today’s CFO is in trying to influence the spirit of integrity across an organisation without the support of a direct reporting line from separate divisions. “Influence without direct control requires more subtle persuasion and engagement,” Broadbent said.

To be effective in shaping the culture and ensuring the accuracy of financial reports, CFOs need to be respectful of colleagues and other business heads. Among a long list of requirements for the CFO, outlined by Broadbent, are the need to encourage a feel for the business, to be inclusive and keep parameters rather than make decisions. CFOs also should be “generous in acknowledging achievement and in assisting the business units, encouraging them to seek involvement from finance in managing and reporting their businesses”. Along the way, the finance chief can be observant of irregularities in attitude and should encourage the rotation of people in and out of the finance division.

Early detection of any intention to misrepresent applies whether it involves a project, a department or a whole company – and the inclination to hide or disguise the truth is reduced in an open culture.

Exploring processes that enhance openness, Broadbent looked back seven years to her first board meeting at the oil and gas company, Woodside, where a heated discussion had ensued about a 25 percent budget overrun on the company’s $1.5 billion Laminaria project north west of Darwin.

The board members of the time had asked if they were the last to be told.

Subsequently, the Woodside executive instigated a red flag system whereby the likely overrun of any project beyond 10 percent would prompt an immediate email to the board.

“It’s the spirit of the red flag idea that’s more important that the information,” claimed Broadbent. “Any early warning about an unexpected situation encourages support and positive input rather than disappointment and aggravation.”

One of the benefits of the red flag approach is in minimising anxiety and in eliminating both the judgment required about when the board should be informed and prevarication over whether or not a project might come back into line…Once it’s out in the open, helpful input comes from other areas and productivity is improved, Broadbent assured the group.

In acknowledging the critical role of the finance cost centre within any organisation, Broadbent also allowed that the CFO and the finance team undertake delicate tasks requiring sensitivity and management skills beyond their technical abilities, as not all operating divisions will support their expansive and invasive ways.
(One sore point she observed is the disproportionate remuneration accorded to CFOs “which can promote jealousies”.)

In Broadbent’s view, finance should position itself as a business partner and not just a service provider. Developing an understanding of each business within a company promotes respect, she said. Without it, the spirit of generosity shrinks and there’s a sub-optimal outcome.

Giving credit where it is due – to the business unit that has achieved good results – rather than accepting the onus for the finance department is a wise strategy, Broadbent advised before concluding with the importance for every CFO to build and retain a diverse and talented team.

The CFO needs to see him- or herself in the context of the whole, she said. “A talented team is a prerequisite to ensuring the good health of the circulation of the company... Setting a high standard of talent management not only helps with the integrity of the numbers but with the spirit and attitude across the organisation.”